EXECUTIVE SUMMARY
The emergence of digital lending platforms in Nigeria has revolutionised the financial landscape, providing a seamless and convenient way for customers to access loans online. With the exponential growth of digital lending, it has become crucial to highlight the established regulatory frameworks that ensure legality, customer protection and data privacy within the digital lending space. This article explores the emergence of digital lending platforms, highlighting its contributions to Nigeria’s financial sector as well as the concerns surrounding the operations of such platforms; particularly as it relates to data protection, data privacy etc. It also delves into the regulatory institutions tasked with monitoring the operations of digital platforms in the country, with the aim of establishing better understanding of how these platforms are regulated to ensure stability within the financial sector.
INTRODUCTION
The traditional model of lending requires approaching a financial institution to obtain a loan on the condition that repayment of such loan will be made at a future date as agreed by the parties. The process often involves conducting a financial review of the borrower’s financial standing, filing of required documents such as guarantor statements, bank statements, address verification documents, etc, coupled with frequent visits to the bank throughout the loan application process which could take weeks or months depending on the type and size of the loan(1). Nigeria’s financial sector recorded a shift from the traditional model of lending to modern lending procedures with the emergence of digital lending platforms(2). These platforms revolutionised the financial landscape in Nigeria, such that customers may obtain loans online seamlessly and within the shortest time possible. The post covid-19 era witnessed the exponential growth of digital lending in Nigeria, as it became an alternative source of accessing funds for addressing pressing financial needs by Nigerians(3). With the growing popularity of digital lending platforms, it became imperative to establish regulatory frameworks to ensure legality, customer protection and data privacy within the financial sector.
OVERVIEW OF DIGITAL LENDING PLATFORM
Digital lending is an innovative approach to obtaining financial support using technology to streamline the application and approval processes(4). It is simply the process of accessing and obtaining loans online using digital platforms. These platforms leverage technology to streamline the lending process, making it more convenient and accessible for borrowers. Whilst the traditional lending process requires loan applicants to physically approach financial institutions to obtain loans, digital lending platforms can be accessed anywhere, anytime online. The process usually involves obtaining and filing an online application form from the desired digital lending platform, providing financial documents such as income statement, credit history, employment details, as well as a valid means of identification(5). An assessment is carried out to ensure the applicant's credit worthiness based on the information submitted, thereafter, the applicant is provided loan offers to choose from with the accompanying interest rate and repayment plan(6). Once final checks are concluded, the application is approved and the funds are disbursed. Asides the convenience occasioned by accessing and obtaining loans online, digital lending platforms process loan applications faster and offer competitive rates(7). In addition, these platforms use artificial intelligence (AI) to offer customer support through virtual assistants, online chats etc. For lenders and debt investors, these platforms allow them tailor their portfolios according to their preference and risk tolerance(8). They can browse through available loans and conduct research before making investment decisions. Despite the many benefits associated with these platforms, there were concerns regarding customer protection and data privacy, as some of the digital lending platforms resorted to unethical debt recovery practices to recover loans from customers(9). Others offered absurd terms for loans with exorbitant interest rates; there were also concerns for lenders as most borrowers obtain loans and refuse to repay, making loan retrieval difficult(10). As a result, it became imperative to establish regulatory frameworks to regulate the operations of digital lending platforms.
REGULATORY LANDSCAPE OF DIGITAL LENDING IN NIGERIA
Federal Consumer and Competition Protection Commission Act (FCCPA) 2018
The FCCPA ( or the ‘Act’) established the Federal Consumer and Competition Protection Commission (the ‘Commission’) as an agency tasked with the responsibility of protecting consumer rights and regulating competition in markets(11). The Commission is dedicated to ensuring that consumers have access to healthy and quality products and services, free from exploitation and harm(12). The Act empowers the Commission to make regulations geared at promoting consumer protection and healthy competition within Nigeria’s competitive market. Particularly, Section 17(b) of the Federal Competition and Consumer Protection Act 2018 provides that the Commission is charged with the responsibility of initiating broad based policies and reviewing economic activities in Nigeria to identify anti-competitive, anti-consumer protection and restrictive practices which may adversely affect the economic interest of consumers and making rules and regulations under the Act and any other enactment with regards to competitions and protection of consumers.
Consumer protection in the digital lending space revolves around ensuring fairness, transparency, and responsible practices for borrowers. Various actions can breach consumer protection principles in the digital lending space. For instance, some digital lenders obscure essential terms within lengthy contracts or use complex language that borrowers may struggle to comprehend fully. This lack of transparency can result in misunderstandings or exploitation of borrowers. Furthermore, aggressive debt collection tactics, such as incessant phone calls, threats of legal action, or contacting employers and family members, infringe upon consumer rights and privacy. Moreover, digital lending platforms that advertise loans with no credit checks or guaranteed approval without clearly disclosing terms and conditions mislead consumers regarding the actual costs and risks associated with borrowing.
In 2022, the Commission issued the Interim Guidelines for the Registration of Digital Lending Platforms in Nigeria (the ‘Guidelines’). The Guidelines were introduced to ensure, amongst others, registration of digital lending platforms in Nigeria with the FCCPC, so as to promote better regulation of their operations(13). Accordingly, all digital lending platforms are required to undergo registration with the Commission. This involves obtaining and filling a form known as ‘form DGL 001’, providing details of their source of funding, website, email address, initial key players, agents, amongst others. Documents such as certificate of incorporation, service level agreements with service providers, evidence of tax payments or tax waivers, evidence of membership in any trade or professional associations, etc are also required to be submitted upon registration with FCCPC. Applicants are also required to fill ‘form DGL 002’, confirming that their business is legitimate and lawful, also indicating that the information provided is accurate and complies with applicable regulatory requirements.
DOES THE FCCPC HAVE THE POWERS TO REGULATE DIGITAL LENDING IN NIGERIA?
There are debates as to the powers of the FCCPC to regulate digital lending in Nigeria. Many are of the opinion that financial services such as digital lending fall under the purview of the Central Bank of Nigeria (CBN) as the apex financial regulatory institution in Nigeria; and that the FCCPC does not possess regulatory powers over financial institutions in the country. Section 65(1)(a) of the Banks and Other Financial Institutions Act (BOFIA) 2020 expressly states that the provisions of the FCCPA shall not apply to any function, act, financial product, or financial services issued or undertaking, and transaction howsoever described by a bank or other financial institution licensed by the Bank (the ‘Bank’ being the CBN). This explains that the FCCPC may make rules and issue directives, except with regards to financial products or services issued by financial institutions licensed by the CBN. Furthermore, BOFIA defines ‘other financial institutions’ to include any individual, body, association, group of persons, whether corporate or unincorporated, other than banks licensed under this Act which carries on the business of a finance company, whether such business is conducted virtually, digitally or electronically(14).
The definition of a ‘finance company’ was adequately captured in the CBN Revised Guidelines for Finance Companies in Nigeria 2014, and refers to companies licensed to carry on the business of providing financial services to individual consumers. Such financial services include consumer loans, particularly the provision of consumer and business loans to individuals and MSMEs, a service digital lending platforms provide (15). The combined reading of the above provisions explains that digital platforms may be regarded as ‘finance companies’ that fall under the regulatory powers of the CBN. More so, where a latter statute is inconsistent with the provisions of an earlier statute on the same subject matter, the provisions of the latter statute will prevail. In this case the provisions of the BOFIA will take precedence.
Therefore, the CBN retains its role as the primary regulatory authority for financial institutions in Nigeria, including licensed digital lending platforms. The FCCPC cannot position itself as a regulator of financial institutions including digital lending platforms, as this would exceed its legal authority. Nevertheless, the FCCPC does have jurisdiction over consumer protection violations within the digital lending sector. Therefore, if digital lending platforms contravene consumer protection principles, the FCCPC has the authority to impose sanctions on these platforms without directly regulating their financial operations.
NIGERIAN DATA PROTECTION DATA PROTECTION ACT 2023
The Nigeria Data Protection Act (NDPA) complements the Nigerian Data Protection Regulations 2019 (NDPR) as the main regulation on data protection in Nigeria, such that where there is conflict between both laws, the Act prevails. The NDPA established the Nigerian Data Protection Commission, tasked with the responsibility of regulating the deployment of technological and organisational measures to enhance personal data protection. The Commission is also mandated to accredit, licence and register suitable persons to provide data protection compliance services. Data protection breaches in the digital lending space can manifest in several ways. This includes instances where lenders mishandle or misuse borrowers' personal and financial information, or neglect to establish strong cybersecurity measures to safeguard sensitive data from unauthorised access. Additionally, breaches may occur through unauthorised sharing of borrowers' personal and financial details with third parties without obtaining explicit consent or disclosing the intended purposes for such sharing. Furthermore, failure to inform borrowers about the methods of data collection, usage, storage, and sharing, along with associated risks, also constitutes breaches in data protection practices.
The NDPA provides rules and regulations governing data protection which applies to data processors or controllers domiciled, resident or operating in Nigeria. Data processors or controllers are individuals, entities or agencies that process personal data of data subjects resident in Nigeria. Digital lending platforms are considered data processors and controllers subject to the provisions of the NDPA because they process personal data provided by applicants during the loan application process. In processing data, such platforms are required to obtain consent of their data subjects or applicants in line with section 25(a) of the NDPA. The section provides that data processing shall be lawful where a data subject has given and not withdrawn consent for the specific purpose or purposes for which personal data is to be processed. Furthermore, the request for consent must be made clearly and the consent given by the data subject must be in the affirmative(16). It may also be provided orally, in writing, or through electronic means(17). The NDPA also highlights principles governing the processing of personal data which all data processors or controllers, including digital lending platforms are mandated to adhere to. Accordingly, a data controller or data processor shall ensure that personal data is processed in a fair, lawful and transparent manner(18). Such data must also be collected for specified, explicit, and legitimate purposes, and not to be further processed in a way incompatible with these purposes(19). In addition, it must be adequate, relevant, and limited to the minimum necessary for the purposes for which the personal data was collected or further processed (20). Digital lending platforms that fail to comply with these principles as well as other provisions under the NDPA, are liable to penalties including fines or imprisonment. As such, digital lending platforms must ensure complete adherence to the provisions of the Act, particularly as it relates to obtaining and processing of customers’ data.
MONEY LENDERS LAWS OF VARIOUS STATES
The Money Lenders Law of various states is the primary legislation which governs money lending across various states of the federation. These laws are targeted at regulating money lending, including digital lending within respective states and sets out the licensing requirements for companies intending to run money lending operations. One of the few states to establish a robust money lenders law is Lagos state; having established the Lagos State Money Lenders Law 2018 (‘MLL’). According to the MLL, a money lender includes ‘every person whose business is that of money lending or who carries on, advertises, announces himself or holds himself out in any way as carrying on that business..’(21). Furthermore, It requires such persons to obtain a licence before engaging in the business of money lending and provides sanctions for persons that fail to do so(22). To obtain the required licence, the money lender must be registered with the Corporate Affairs Commission as a limited liability company with at least two directors(23). Furthermore, an application must be made to the Chief Magistrate within the District where the money lending business is situate(24). A further application is made to the Lagos State Ministry of Home Affairs together with accompanying documents as stipulated in the MLL(25). It is imperative to note that money lenders, including digital lending platforms are only authorised to provide their services within the state under which law the money lenders licence was issued(26), thus in the event that a state is yet to enact a money lenders law, digital lenders operating within such state will have to be licensed by the CBN as a finance company under the CBN Revised Guidelines for Finance Companies in Nigeria 2014.
COMPANIES AND ALLIED MATTERS ACT 2020
The Companies and Allied Matters Act 2020 regulates companies and businesses that operate within Nigeria. The Act establishes the Corporate Affairs Commission as the regulatory body tasked with ensuring compliance with the provisions of the Act. According to section 8 of the Act, the Commission is empowered to supervise the formation, incorporation, management and dissolution of companies, incorporated trustees and business names in Nigeria. Therefore, any business enterprise, corporation or organisation must comply with the provisions of the Act and be duly registered by the Commission. Upon registration, such company is issued a certificate of incorporation, rendering it a valid entity licensed to carry out business operations within Nigeria. Registration with the Commission is a licence requirement for digital lending platforms as lenders are required to provide a certificate of incorporation issued by the Commission before they can be licensed by the CBN, FCCPC or the Money Lenders Law under various states.
CONCLUSION
Digital lending platforms have provided an easier and efficient way to access loans in Nigeria. However, with the rapid growth of digital lending, it is crucial to establish a harmonious relationship among regulatory institutions. This collaboration will promote consistency, protect borrowers and create a favourable environment for the growth and success of digital lending platforms. By working together these institutions can establish clear guidelines and responsibilities, ensuring that digital lending platforms operate within a regulated framework. Additionally, the requirement for money lenders to be licensed under the laws of each state they intend to operate makes the licensing process somewhat cumbersome due to the several steps and requirements involved in obtaining a money lenders licence in each state. This buttresses the earlier point on the need for a robust framework that caters to the needs of both borrowers and lenders.
REFERENCE:
Ibid.
Ibid.
https://p2pmarketdata.com/articles/digital-lending/ accessed 12th May 2024.
Ibid.
Ibid.
https://www.linkedin.com/pulse/explore-future-lending-how-digital-software-help-lenders accessed 12th May 2024.
https://p2pmarketdata.com/articles/digital-lending/ accessed 12th May 2024.
https://www.dataphyte.com/latest-reports/digital-lending-platforms-are-good-but-their-activities-are-suspect/ accessed 12th May 2024.
https://fccpc.gov.ng/resources-library/fccpa/#:~:text=The%20FCCPA%20established%20the%20Federal,to%20safe%20products%20and%20secure accessed 12th May 2024.
Section 17(a) Federal Consumer and Competition Protection Act 2018
Ibid.18(b)
FCCPC Interim Guidelines for the Registration of Digital Lending Platforms in Nigeria
Section 131 Banks and Other Financial Institutions Act 2020
Section 2 CBN Revised Guidelines for Finance Companies in Nigeria, 2014
Section 26(7) Nigeria Data Protection Act 2023
Ibid.
Section 24(1)
Ibid.
Ibid.
Section 2 Lagos State Money Lenders Law 2018
Ibid.Section 5(1)
https://trustedadvisorslaw.com/procedure-for-money-lenders-license-in-nigeria/ accessed 7th July 2024.
Ibid.
Ibid.
https://trustedadvisorslaw.com/procedure-for-money-lenders-license-in-nigeria/ accessed 7th July, 2024.